There’s nothing like being your own boss. The freedom to choose your projects, your hours, even eventually choosing your clients, and the notion that there is a direct correlation between your hard work and your income – is what most entrepreneurs value.
However, a downside to being self-employed occurs when applying for a mortgage – you just don’t fit in the traditional lending model that is based on having a pay stub.
If you’re self-employed, here are a few tips that should make the process of buying a home a little easier.
• Expect a lot of paperwork and make sure you plan ahead. If we look at it from the lender’s point of view, it makes sense – they want to know you will be able to pay them back.
• You will be expected to show the past two years of tax returns. Since you are used to lowering your taxable income by maximizing business expenses and personal deductions, it results in a significantly lower amount than what you actually take home. So, write off fewer expenses in the two years leading up to your mortgage application, it may mean you pay more in personal taxes, but your income will be higher.
• Set up your finances through a certified accountant. Not only do lenders prefer it, but a certified accountant knows what to look for and have enough experience to understand the tax implications.
• Make sure you are working for the two years prior to purchasing. If you are planning an extended holiday, take that time after your purchase.
• Ask your mortgage broker about stated income. If you have been in the same profession for two years prior to being self-employed, the lender can research the average income in that same profession. Although this method is a more complicated approach and will require more documentation, it is the typical avenue most entrepreneurs take.
• Make sure you are up-to-date with income and sales tax returns, and that you don’t owe any taxes.
• For sole proprietors or owners of an unincorporated business, making the leap to incorporation could also help. Most banks prefer salaries and if you have a corporation you can pay yourself a salary which makes it easier to qualify for a mortgage.
• A good credit score will improve anyone’s chance of getting a loan. Make sure you review your credit report and resolve any errors. You can also keep your credit in good shape by doing the following:
1) Keeping credit card balances low
2) Avoid applying for other credit cards or lines of credit while applying for a mortgage
3) Pay your accounts on time
• Keep your business and personal bank accounts separate. Being organized and separating the accounts helps lenders navigate your business income and expenses.
• Find a lender that has experience working with self-employed entrepreneurs. Someone who can guide you through the process and is used to dealing with the mounds of paperwork and pitfalls.
With these tips and careful planning, most self-employed entrepreneurs should be able to navigate the home buying process. If you need any help, or need a referral for a “problem-solving” mortgage broker, give me a call at 647-898-4663, or send me an email at Alex@AlexBeauregard.com today.